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Journal of Economic Integration 2019 March;34(1) :159-188.
DOI: https://doi.org/10.11130/jei.2019.34.1.159
Fiscal Policy Effects and Capital Mobility in Latin American Countries
Jose U. Mora and 
Rafael A. Acevedo 
Pontificia Universidad Javeriana – Cali, Colombia
Texas Tech University, USA
Corresponding Author: Jose U. Mora ,Tel: 57 2 3218200 ext 9055, Email: jose.mora@javerianacali.edu.co
Copyright ©2019 Journal of Economic Integration
ABSTRACT
This paper studies the relationship between the size of the fiscal multiplier and the degree of capital mobility in some Latin American countries. Mundell’s (1963) and Fleming’s (1962) models show that this effect could be very large or small (close to zero) depending on the exchange rate and the degree of capital mobility, and the potency of a fiscal policy is inversely correlated with the degree of capital mobility. Based on Mora’s (2013) model, we argue that the multiplier might not be negatively correlated with capital mobility in these countries. In other words, the potency of fiscal policy could be small because the degree of capital mobility in Latin American countries is quite low. The empirical findings support our hypothesis. We have found that the size of the fiscal multiplier tends to increase or (at least) to remain around 1.40 in these countries in the short run; however, in the long run, this effect tends to decrease significantly to 0.34. These results also suggest that the effectiveness of fiscal policies in Latin American countries are still large but could be larger if they become more financially integrated with the rest of the world.

JEL Classification
E62: Fiscal Policy
E12: Keynes; Keynesian; Post Keynesian
F41: Open Economy Macroeconomics
O54: Latin America; Caribbean
Keywords: Fiscal policy | Business cycles | Latin America
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